July 21, 2008

Valuecruncher has valued MSFT at US$33 a share, compared to the current price of US$26 a share.

Valuecruncher points out that:

The Client (Windows), Server and Tools (enterprise solutions) and MBD (Office) divisions drive 83% of revenues and over 100% of operating profits (the On-line Services and Entertainment divisions are still operating at a loss).

The point reminded me of this speech (pdf) by David Einhorn of Greenlight Capital. Basically he says the market is undervaluing MSFT by not recognising the value of the core business (Windows, enterprise solutions and office), while punishing MSFT for the divisions that are losing money.

He argues that the core business deserves a higher multiple, while the money losing divisions will not burn cash indefinitely. And goes on to outline the other potential options embedded in the company, like Windows mobile. He also notes that MSFT need to take on some debt and return cash to shareholders. Of course the Yahoo transaction could interfere with this, but overall it seems pretty sensible.

Here are a few quotes from the speech (pdf):

If I strip out these unprofitable segments from the consolidated numbers, Microsoft trades at 9x EBIT and 13.5x P/E (on adjusted fiscal 2007 estimates). Chemical Companies, Farm Equipment Companies and Railroads trade at higher multiples than this at the top of their cycles. Even Supermarkets trade higher than this.

I am not a techie and I am not going to outline how Microsoft is going to compete and win in every area they have targeted…. But I do know that Microsoft has invested and is continuing to invest over $6 billion a year in these things. This investment penalizes operating earnings every quarter. I believe that the current value of Microsoft shares implies that these investments are value destroyers. With Microsoft’s history, I am willing to take the other side of that bet without a PhD.

If Microsoft took the part of its mission to work for shareholders seriously it would optimize its cost of capital. Instead of $35 billion of cash it should hold perhaps $40 billion of debt or 2 times EBIT. This sort of recapitalization would return one third of the market capitalization to shareholders through dividends or buybacks.

As of 31 March 2008, Greenlight Capital held a US$387m position in MSFT, the second biggest position in their fund behind TGT. If you do a search for Greenlight Capital under Institutional Holdings on you can see all the holdings in Greenlight’s US$2.6bn portfolio.


America’s Infrastructure

July 2, 2008

The Economist has an article about the current infrastructure in America. The article contains some of the same figures which Sellers Capital use in their VMC investment thesis.

A few excerpts from the article:

In 2005 the American Society of Civil Engineers estimated that $1.6 trillion was needed over five years to bring just the existing infrastructure into good repair. This does not account for future needs.

The private sector is hungry to invest. In May Morgan Stanley raised $4 billion for its new infrastructure fund.

In January a national commission on transport policy recommended that the government should invest at least $225 billion each year for the next 50 years.

The article also outlines the underfunding of water infrastructure. Which is one the reasons behind Whitney Tilson picking MWA in July 2007, as mentioned in Kiplinger.

America’s ageing water infrastructure is sorely underfunded: the Environmental Protection Agency forecasts an $11 billion annual gap in meeting costs over the next 20 years.